What Is a Testamentary Trust and Should You Have One?

When planning your estate, you may have heard of a Testamentary Trust and wondered whether it’s right for you. This powerful estate planning tool can provide asset protection, tax benefits, and flexibility for your beneficiaries. Here’s what you need to know.

What Is a Testamentary Trust?

A Testamentary Trust is a type of discretionary trust established through your Will. Unlike a regular family trust created during your lifetime, a Testamentary Trust only takes effect after your death. The assets placed in the trust are managed by a trustee for the benefit of the beneficiaries you choose.

Why Have a Testamentary Trust?

Creating a Testamentary Trust through your Will offers several benefits that a standard Will cannot provide:

✅ Asset Protection

• The assets in the trust are legally owned by the trustee, not the beneficiaries. This means creditors or ex-spouses of beneficiaries may have limited access to these assets.
• In cases of bankruptcy, the trust’s assets are typically protected, as they are not personally owned by the beneficiaries.
• During a marriage breakdown, a well-structured Testamentary Trust may safeguard assets from being divided as part of a property settlement. However, the Family Court has the power to consider trust assets in certain circumstances, so careful planning is essential.

✅ Tax Benefits

• With a standard Will, beneficiaries receive their inheritance in their own name and pay tax on any income earned at their personal marginal tax rate — potentially as high as 47%.
• In a Testamentary Trust, the trustee can distribute income among beneficiaries, including minor children. Unlike other trusts, minors are entitled to the full adult tax-free threshold (around $18,200) before being taxed.
• Example: If a Testamentary Trust earns $100,000 in rental income and has six minor grandchildren, each child could receive $16,670 without paying tax. If the same assets were left directly to adult beneficiaries, the income could be taxed heavily.

✅ Flexibility

Testamentary Trusts can be tailored to suit your unique circumstances. You can decide:

• Who will be the trustee and any backup trustees.
• The trustee’s powers and limitations.
• Who the beneficiaries are — including children, grandchildren, spouses, and others.
• How and when beneficiaries can access the income or capital of the trust.
• Conditions to prevent vulnerable beneficiaries, such as those with addictions or poor financial management, from misusing their inheritance.

Is a Testamentary Trust Right for You?

A Testamentary Trust may be ideal if:

• You want to protect your beneficiaries’ inheritance from creditors or ex-partners.
• You have minor beneficiaries and want to minimise tax on their inheritance.
• You are concerned about a beneficiary’s ability to manage their finances.
• You wish to control how and when beneficiaries receive their inheritance.

Get Expert Advice

Setting up a Testamentary Trust requires careful planning to ensure it meets your needs and legal requirements. Our experienced estate planning team can help you decide whether a Testamentary Trust is the right choice for your family.

Contact us today for a complimentary consultation to discuss your estate planning options.

If you’re ready to discuss your estate planning or need assistance preparing a testamentary trust, contact us on 07 5576 9999 to schedule a consultation with our award-winning estate planning team today.

Alternatively, you can get started online now by clicking here.